strategic management of mergers

Strategic Management Of Mergers : 

Strategic Management Of Mergers Presented by- Kalpana MBA-IB

AGENDA : 

AGENDA STRATEGIC MANAGEMENT STEPS OF STRATEGIC MANAGEMENT OF M&A SOME DECISION STRATEGIES OF ACQUIRER TARGET CASE : ARCELOR MITTAL MERGER FAILURE OF M& A MAJOR FACTORS REASONS FOR FAILURE AT DIFFERENT STAGE CASE : DAIMLER CHRYSLER MERGER

Slide 3: 

“Strategic management is an ongoing process that evaluates and controls the business and the industries in which the company is involved; assesses its competitors and sets goals and strategies to meet all existing and potential competitors; and then reassesses each strategy annually or quarterly [i.e. regularly] to determine how it has been implemented and whether it has succeeded or needs replacement by a new strategy to meet changed circumstances, new technology, new competitors, a new economic environment., or a new social, financial, or political environment.” (Lamb, 1984:ix) Strategic management is the art and science of formulating, implementing and evaluating cross-functional decisions that will enable an organization to achieve its objectives. Strategic management, therefore, combines the activities of the various functional areas of a business to achieve organizational objectives. A. Strategic management

Slide 4: 

Strategic management in case of mergers will cover the various things management should consider during the merger process. It will also cover what all things should the management do to get maximum out of the mergers

B. Strategic Management of Mergers : 

B. Strategic Management of Mergers Integration process Due Diligence Organizational dynamics created by M&A Organizing, involving coordinating task force Honest communication Retaining key people Structure and staffing decision Merger measurement Cultural integration Human capital Integration and HR functions Merger repair Recommendation for success

1.INTEGRATION : 

1.INTEGRATION Motives Threats Impact of mergers Steps in Mergers Stages of Mergers

i. Merger Motives : 

i. Merger Motives Growth and diversification Synergy Fund raising Increased managerial skill/technology Tax consideration Increased ownership liquidity Defense against takeovers

ii. Threats Of Mergers.. : 

ii. Threats Of Mergers.. Monopolizing of industry Cost cutting through Lay-offs Poor synergy realization Induces complexity, duplication of people, processes and technology There are various aspects which if not managed carefully during a merger can become major pitfalls, for example, issues of managing Intellectual Property, human resources encompassing cultural diversity and perspectives, technology platforms, supply chain management, product/service delivery channels, etc.

iii. Impact Of Mergers And Acquisitions : 

iii. Impact Of Mergers And Acquisitions On workers or employee: - layoffs 2. On top level management: - clash of egos - variation in culture 3. On shareholders: a) of acquiring firm -most affected, they are harmed by the same degree to which target firm shareholders benefitted b) of target firm -benefitted the most -acquiring company usually pays a little excess than it what should

iv. Steps in M&A : 

iv. Steps in M&A Pre Merger Assessment/Due Diligence Negotiation Merger 1. Decision Implementation Post merger Integration Each stage is very critical from the point of view of a merger.

v. Stages Of Merger : 

v. Stages Of Merger 1. Pre-merger stage: Both firms gather information about the uncertain synergy gains of merging. Information can be shared or kept private. 2. Merger Stage: Managers of both firms decide unilaterally (and sequentially) whether to merge. Only when both firms agree to merge there is a post-merger stage. 3. Post-Merger Stage: The two units of the new firm decide unilaterally and simultaneously whether to do an integration effort.

2.DUE DILIGENCE : 

2.DUE DILIGENCE Literally means persistent application to one’s work. Detailed investigation process by an investor for the target company business. Influence decisions like direction of investment, choosing of investment partner, disclosures etc Persons involved : professional advisors, financial/legal/operational professionals Areas of due diligence : Financial Due Diligence Legal Due Diligence Operational Due Diligence

2.1.1 Financial Due Diligence : 

2.1.1 Financial Due Diligence Examining the target company’s historical, current and prospective operating results, can be worked out from following sources Audited financial statements. Unaudited financial information Financial information with stock exchanges and regulators regulation(SEBI) Tax returns Cash Flow Statements

2.1.2 Legal Due Diligence : 

2.1.2 Legal Due Diligence Involves the practices of addressing certain fundamental legal issues which include good compliance practices as per the Company’s Act, SEBI Act, Income Tax Act and other corporate legislations. Can be done from following sources: Memorandum of Association Target company’s Prospectus Documents filled with Registrar of companies Tax returns and compliance service Environmental law Compliance Lending agreements , Covenants and borrowing powers Compliance with any special industry legislation Labor agreements ,compensations Pending litigation

2.1.3 Operational Due Diligence : 

2.1.3 Operational Due Diligence Includes investigating the target’s IPRs, its productions, its sales and marketing effort, its HR and other operational issues. They can be taken by analyzing information from: Newspaper and magazines reports ABOUT THE TARGET Information with trade association chambers and regulatory bodies Company journal, brochure & websites Inputs from market, market experts, suppliers & customers Interviewing the employees, ex-employer etc

2.2 Conducting Due Diligence : 

2.2 Conducting Due Diligence There are 2 ways of conducting Due Diligence : Data room method : large amount of data is presented to interested party to study it Questionnaire method: a questionnaire is put to target company and on the basis further one to one negotiations are done

2.3 Contents of Due Diligence Report : 

2.3 Contents of Due Diligence Report Corporate documents of the Company and Subsidiary Issue of Shares Material Contracts and Agreements Litigation Employees and related inormation Immovable property Taxation Insurance and liability Joint venture and collaboration agreement Government regulations-

3.1 Organizational Dynamics Created By M&A : 

3.1 Organizational Dynamics Created By M&A Aggressive financial targets Short timeliness Culture clashes Politics and positions Restructuring & re-engineering Communication issues Employee motivation Question about where to downsize Retention of key personnel

Concepts of change management : 

Concepts of change management Define clear leadership goals Extensive communication Tough decisions Focus on customers Manage resistance at every level

5. Communication Model For Mergers : 

5. Communication Model For Mergers Effective communication is made a priority All messages linked to strategic objective of the integration effort Honest communication Proactive emphasis than reactive one Messages should be consistent and repeated Mechanism for two way feedback

6.Retaining key people : 

6.Retaining key people Identify key people Understand what motivates them Why people stay- job content, level of responsibility , company culture, salary Why people leave- low growth potential Lack of challenge, lack of autonomy, work environment issues, salary issues etc.

7.Structure and Staffing Decisions : 

7.Structure and Staffing Decisions Always a difficult one, politically and emotionally charged, so some general principles to follow: Begin with due decision analysis of HR Act quick- the sooner, the better Communicate openly about staffing decisions Train hiring managers on steps of responsible selection procedure Catch and correct mistakes Start development and team building process asap

8.Merger Measurement : 

8.Merger Measurement Keeping a track of whether moving in right direction on realizing the goals of deal Identify the potential “hot spots” before they flare OOC! Ensuring a smooth flow of information Involving more people in integration process Sending message about the new company’s culture Integration measures, operational measures, process & cultural measures and financial measures

8.1 Measurement .. : 

8.1 Measurement .. Integration measure: whether the overall integration approach is accomplishing its mission of leading organisations through change? Operational measures: tracking any potential merger related impact on day-to-day business-sales, safety, consumers

8.1 Measurement.. : 

8.1 Measurement.. Process and culture measures: are the business and management processes being effectively redesigned and implemented? Financial measures :Are we achieving the deal synergies? –eg classroom training, emailed synergy kit. Integration measured through: Automated feedback channel- emails, confidential toll-free hotlines and bulletin boards on a website Targeted telephone surveys

9 Cultural Integration : 

9 Cultural Integration Most integration initiatives fall short of reaching their goals during implementation stage and follow-up. Organization culture comprises of : rules and policies, goals and measures , rewards and recognition, staffing & selection, Training & development, Ceremonies and event, Leadership behavior, communication, physical environment . The company should recruit and promote service oriented candidates, train the workforce in techniques of service Set goals that are based on service Reward an recognize people for higher level of service

10 Human Capital Integration & HR Functions : 

10 Human Capital Integration & HR Functions HR contribute strategically to enterprise wide integration between manufacturing, finance, R&D and marketing and sales Support business group transition activities like staffing& selection etc Integrate new organisation and process

11 Merger Repair : 

11 Merger Repair You closed the deal over 2 years ago, but organisation is still not operating as one company. Merger repair refers to post deal integration.

YOU NEED A MERGER REPAIR WHEN.. : 

YOU NEED A MERGER REPAIR WHEN.. Service is suffering Customers are confused and defecting Performance targets have not been achieved Stock prices falling Key integration activities are behind schedule Analysts comments The organisation cannot handle additional acquisition Key executives and employees are leaving and many more.

12.Key To M&A SUCCESS : 

12.Key To M&A SUCCESS Conduct due diligence analyses in financial and human capital related areas Determine require/desired degree of integration Speedy(not reckless) decisions Gain the support and commitment from senior managers Clearly defined approach of integration Select highly respectable and capable integration leader Dedicated capable people for the integration core team and task force Use best practices Set measurable goals and objectives Continuous communication and feed back

C. DECISIONS strategies : 

C. DECISIONS strategies For Acquirer : a) If negotiations go successful- move on with implementation step for friendly merger. b) But if negotiations are not successful- Hostile takeovers, Tender offers, Dawn Raid For Target : a) If happy with the deal , accept the offer OR b) Negotiate the terms of Deal or c) If the target finds the valuation to be very low or if there is some unconscionable flaw in the deal then they may reject the deal ,then dangers of hostile takeover arise.

Tactics of acquirer : 

Tactics of acquirer 1. Hostile Takeover This is an unfriendly takeover attempt by a company or raider that is strongly resisted by the management and the board of directors of the target firm. These types of takeovers are usually bad news, affecting employee morale at the targeted firm, which can quickly turn to animosity against the acquiring firm

Tactics of acquirer : 

Tactics of acquirer Tender offer :An offer to purchase some or all of shareholders' shares in a corporation. The price offered is usually at a premium to the market price. Tender offers may be friendly or unfriendly. Securities and Exchange Commission laws require any corporation or individual acquiring 5% of a company to disclose information to the SEC, the target company and the exchange

TAKEOVER DEFENSES BY TARGET CO. : 

TAKEOVER DEFENSES BY TARGET CO. Golden Parachute This measure discourages an unwanted takeover by offering lucrative benefits to the current top executives, who may lose their job if their company is taken over by another firm. Benefits written into the executives’ contracts include items such as stock options, bonuses, liberal severance pay and so on. Golden parachutes can be worth millions of dollars and can cost the acquiring firm a lot of money and therefore act as a strong deterrent to proceeding with their takeover bid. Shark Repellent : Any one of a number of measures taken by a company to fend off an unwanted or hostile takeover attempt. In many cases, a company will make special amendments to its charter or bylaws that become active only when a takeover attempt is announced or presented to shareholders with the goal of making the takeover less attractive or profitable to the acquisitive firm.

Slide 35: 

Leveraged recapitalization : Payment of large debt financed dividend. This strategy increases the firms financial leverage, thereby deterring takeover attempt. Macaroni Defence This is a tactic by which the target company issues a large number of bonds that come with the guarantee that they will be redeemed at a higher price if the company is taken over. Why is it called macaroni defense? Because if a company is in danger, the redemption price of the bonds expands, kind of like macaroni in a pot! This is a highly useful tactic, but the target company must be careful it doesn't issue so much debt that it cannot make the interest payments. People Pill : Here, management threatens that in the event of a takeover, the management team will resign at the same time en masse. This is especially useful if they are a good management team; losing them could seriously harm the company and make the bidder think twice

Slide 36: 

Poison Pill With this strategy, the target company aims at making its own stock less attractive to the acquirer. There are two types of poison pills. The 'flip-in' poison pill allows existing shareholders (except the bidding company) to buy more shares at a discount.. The goal of the flip-in poison pill is to dilute the shares held by the bidder and make the takeover bid more difficult and expensive. The 'flip-over' poison pill allows stockholders to buy the acquirer's shares at a discounted price in the event of a merger. If investors fail to take part in the poison pill by purchasing stock at the discounted price, the outstanding shares will not be diluted enough to ward off a takeover. An extreme version of the poison pill is the "suicide pill" whereby the takeover-target company may take action that may lead to its ultimate destruction. Sandbag With this tactic the target company stalls with the hope that another, more favorable company (like “a white knight”) will make a takeover attempt. If management sandbags too long, however, they may be getting distracted from their responsibilities of running the company.

Slide 37: 

White Knight This is a company (the “good guy”) that gallops in to make a friendly takeover offer to a target company that is facing a hostile takeover from another party (a “black knight”). The white knight offers the target firm a way out with a friendly takeover. Scorched Earth Policy : An anti-takeover strategy that a firm undertakes by liquidating its valuable and desired assets and assuming liabilities in an effort to make the proposed takeover unattractive to the acquiring firm.

Case – Arcelor-Mittal merger : 

Case – Arcelor-Mittal merger In January 2006, Mittal Steel launched a $22.7 billion offer to Arcelor’s shareholders. The deal was split between Mittal Shares (75 percent) and cash (25 percent). Under the offer, Arcelor shareholders would have received 4 Mittal Steel shares and 35 euros for every 5 Arcelor shares they held. The steel industry is highly fragmented, the top 5 manufacturers in the steel industry account for less than 25 percent of the market (to put that in perspective, the corresponding figure for the automotive industry is 73 percent). LN Mittal believes that the consolidation will end with three of four major companies dominating the industry around 2010.

tHE Controversy?? : 

tHE Controversy?? Arcelor Management: The management believed that Arcelor itself would have been doing the acquisitions and not the other way around. The management was extremely hostile to Mittal Steel’s bid from the beginning. Arcelor repeatedly played the patriotic card in order for shareholders to reject the bid. Guy Dolle the CEO of Arcelor dismissed Mittal Steel as a “company of Indians” and unworthy of taking over a European company. (all this despite the fact that most industry analysts and investment banks pointing out that the deal was in Arcelor‘s best interests) The French government (despite not being a shareholder) was against the deal because of worries over its 28000 Arcelor employees. Despite repeated assurances from Mittal that the deal would not lead to layoffs the government of France was never convinced. The government of Luxembourg (a stakeholder) was against the deal as well for a variety of reasons. The European Union approved of the Mittal-Arcelor deal.

The stance of the Indian Government : 

The stance of the Indian Government Most Indians were of the opinion that the deal was not getting pushed through because of Lakshmi Mittal’s Indian nationality. The Indian government raised the issue at several forums especially through commerce minister Kamal Nath. It was also alleged that India had threatened not to ratify a taxation accord with Luxembourg due to the latter’s opposition to the deal. The irony is that LN Mittal himself felt that there was no case of “racism” here as Mittal Steel was a European company and NOT an Indian one.

And the outcome was… : 

And the outcome was… The deal was finally clinched when the shareholders of Arcelor agreed to Mittal Steel’s offer ending the transaction that had dragged on for months. Mittal had to however considerably sweeten the initial offer. Under severe pressure to counteract the Arcelor- Severstal merger, Mittal had to raise its valuation of Arcelor to $32.9 billion. The Mittal family holds 43 percent of the combined group. The combined company holds 10 percent of the global market for steel. The consolidation phase is well and truly underway .

Work out inference on…. : 

Work out inference on…. Strategy adopted by Arcelor Strategy adopted by Mittal.

Some terms… : 

Some terms… Tender offer Poison pill Dawn raid Saturday night special Golden parachute Greenmail Macaroni defense People pill Sand bag white knight Hostile takeover Antitrust

FAILURE OF MERGER & ACQUISITION : 

FAILURE OF MERGER & ACQUISITION Mergers and Acquisitions (M&As) have become the dominant mode of growth for organizations seeking a competitive advantage in an increasingly complex and global business economy. Every merger, acquisition, or strategic alliance promises to create value from some kind of synergy, yet statistics show that the benefits that look so good on paper often do not materialize. Unfortunately, many mergers and acquisitions fail to meet their objectives, which are typically to accelerate growth, cut costs, increase market share or take advantage of other synergies.

Slide 45: 

A global A.T.Kearney study suggests that 58 percent of all mergers, acquisitions, and other forms of corporate restructuring fail to produce results rather than create value. Similarly, a KPMG survey found that "83 percent of mergers were unsuccessful in producing any business benefits regards shareholder value. A major McKinsey & Company study found that "61 percent of acquisition programs were failures because the acquisition strategies did not earn a sufficient return (cost of capital) on the funds invested". Between 55 and 77 percent of all mergers fail to deliver on the financial promise announced when the merger was initiated. Even though most mergers and acquisitions are carefully designed, they still face major challenges. Nearly two-thirds of companies lose market share in the first quarter after a merger; by the third quarter, the figure is 90 percent. In the first four to eight months that follow the deal, productivity may be reduced by up to 50 percent. WHY FAILURES?

And the majority of “FAILURE” IS ATTRIBUTED TO…. : 

And the majority of “FAILURE” IS ATTRIBUTED TO…. The Human Factor & The Cultural “Misfit” 

STRATEGIES FOR MANAGING HUMAN RESOURCE IN M&A : 

STRATEGIES FOR MANAGING HUMAN RESOURCE IN M&A Communication Common culture Training and development Mutual respect Individual counseling

Reasons for failure at different stages of merger(SUMMED UP) : 

Reasons for failure at different stages of merger(SUMMED UP) Pre merger Lack of research Incomplete and Inadequate Due Diligence Excessive premium Size Issues Striving for Bigness Faulty evaluation Merger between Equals Mergers between Lame Ducks Merger Lack of Proper Communication Diversification Diverging from Core Activity

Slide 49: 

POST MERGER Poor Cultural/organisation Fits Ego Clash Failure of Leadership Role. Poorly Managed Integration Inadequate Attention to People Issues Loss of Identity

CASE: Daimler Chrysler Merger Failure : 

CASE: Daimler Chrysler Merger Failure In 1926, the merger of two German automobile manufacturers Benz & Co. and Daimler Motor Company formed Stuttgart-based, German company Daimler-Benz. Its Mercedes cars were arguably the best example of German quality and engineering. In 1998, Daimler-Benz and U.S. based Chrysler Corporation, two leading global car manufacturers, agreed to combine their businesses in what was perceived to be a 'merger of equals'. Jurgen Schrempp, CEO of Daimler-Benz and Robert Eaton, Chairman and CEO of Chrysler Corporation met to discuss the possible merger. The merged entity ranked third (after GM and Ford) in the world in terms of revenues, market capitalization and earnings, and fifth (after GM, Ford, Toyota and Volkswagen) in the number of units (passenger-cars and commercial vehicles combined) sold. .

Slide 51: 

In 1998, co-chairmen and co-CEOs, Schrempp and Eaton led the merged company to revenues of $155.3 billion and sold 4 million cars and trucks. But in 2000, it suffered third quarter losses of more than half a billion dollars, and projections of even higher losses in the fourth quarter and into 2001. In early 2001, the merged company announced that it would slash 26,000 jobs at its ailing Chrysler division In May 2006, after a decade of disappointing results, Daimler finally sold Chrysler to private equity firm Cerberus Capital for £3.74 billion. The Daimler Chrysler merger proved to be a costly mistake for both the companies. Daimler was driven to despair, and to a loss, by its merger with Chrysler. In 2006, the merged group reported a loss of 12 million euros. The good results this quarter have come after selling the Chrysler division in the U.S. and cutting jobs at Mercedes-Benz Cars. Without Chrysler, Daimler reported profits of 1.7 billion euros (£1.3 billion) for the fourth quarter and a net profit of 4 billion euros for the year (3.8 billion euros in 2006). Sales rose to 99.4 billion euros ($144.98 billion) from 99.2 billion euros, with 2.1 million automobiles sold globally.

cAN yOU gUESS wHY tHE mERGER fAILED ? : 

cAN yOU gUESS wHY tHE mERGER fAILED ?

Inferences… : 

Inferences… Analysts felt that though strategically, the merger made good business sense. But contrasting cultures and management styles hindered the realization of the synergies. Daimler-Benz attempted to run Chrysler USA operations in the same way as it would run its German operations. Daimler-Benz was characterized by methodical decision-making. On the other hand, the US based Chrysler encouraged creativity. While Chrysler represented American adaptability and valued efficiency and equal empowerment Daimler-Benz valued a more traditional respect for hierarchy and centralized decision-making.

REFERENCE : 

REFERENCE The Complete Guide To Mergers And Acquisitions PROCESS TOOLS TO SUPPORT M&A INTEGRATION AT EVERY LEVEL- by Timothy J. Galpin & Marc Herndon second edition

THANK YOU !! : 

THANK YOU !! 